Insurance brokers play a vital role as a trusted advisor of the insured
Yet a recent survey we undertook of commercial business owners, on average, scored their trust of their insurance broker at only 6.4. That is in fact lower than the score they gave for insurers themselves (6.9).
So why, in an industry built on a promise, is trust is no longer being built with customers?
I would argue that to rebuild that trust, brokers need to usher in an era of radical transparency. That means No more asking insurers to no quote a risk and block the market. No more withholding your earnings until you're explicitly asked. No more variable commission rates insurer-by-insurer. No more choosing of which quotes you do and don't show the client. No more block transfers of business to the highest bidder
Everything must be out in the open and demonstrable.
Commission itself is nonsensical
Commission is a strange notion when you think about it - the person who is there to get the customer the best deal possible is financially rewarded by doing the exact opposite.
You’d expect it to be the opposite.
And that’s more the fault of the mechanism than the broker, due to it being a percentage. However, when it becomes a flat fee, not only does it mirror other respected, advice-giving, professional industries, such as solicitors, but it also no longer incurs the 12% insurance premium tax.
Do not start me on the nonsense of taxing something that demonstrates financial prudency and responsible practice.
But the most important point, is that when it becomes a flat fee, it can (and should) be disclosed upfront. Furthermore, the customer can have faith that the broker is acting in their best interest, because they earn the same amount regardless of the outcome.
It can also work in the broker’s favour. Does it not seem crazy that two restaurant policies, one of which we put through e-Trade and another, that required serious broking effort and negotiating, should offer the same level of remuneration to the broker?
A flat fee, disclosed up-front and commensurate with the work involved, is the fairer approach for all involved.
The impact of broken broking
If broking is broken, who suffers as a result?
Is it the broker themselves? Perhaps the workers, but certainly not those who benefit from the business' underlying success.
Brokers drove down insurer’s prices through the soft market, as is their implied duty, but wanted to earn the same monetary commission levels. Resultantly, commission percentages rose and rose to unsustainable levels.
Now that the market is hardening, are broker lowering those commission level expectations? Not one bit - they're fighting tooth and nail to keep them as high as possible. Worst still, not a day goes by where you won't see brokers bemoaning the hardening market and the fact they're having to remarket risks under the weight of price increase.
Should that not be happening anyway?
The problem is, that the broking teams are now being expected, with the same amount of resource, to suddenly do 10x more work than they did previously. Simply encouraging a client to stick with the same insurer every year, as long as the premium stayed about the same, is no longer an option. Every risk is seeing increases and every customer is putting them under pressure to remarket - such is the way we have trained our customers to buy.
What it means for insurers
So, is it the insurers that suffer? Partially.
If you look at the Property Owners market, for example, despite all the risk and exposure being at their end, insurers are often paying away 35-45% of the premium in commission alone to grease all of the cogs in the transaction. Now add in pay-to-play fees, marketing budgets and overrides - it's a wonder they've been able to make any money.
"That's just how the property market works though" I can hear people say. Well, it shouldn't. And we should be ashamed as an industry that we've enabled that model.
As the market hardens, it's vital that insurers use this opportunity in time to get commissions back under control and force brokers to find more sustainable models that those which are currently in play.
Broking broken for the customer
Ultimately, it's the customer who suffers under the existing model, as their requirements become a number on a balance sheet used to leverage higher earnings.
When something offers value for money, sellers generally shout about it. They draw the customer's attention to it.
If broker commissions offer good value, why aren't they front and centre of a proposition?
Put simply - because they too often don't.
Could you ever hear a customer saying; "Given everything they do for me, I can't believe I only paid £20k to my broker (on this £100k risk)"?
Granted, at the smaller end of the market with eTraded policies worth only a few hundred pounds - the value for money is almost certainly there, but what about the mid to Enterprise market?
There is some irony that those who are there to remind customers of the burden of disclosing material facts operate on a principle that they must only disclose their earnings when expressly asked.
This is one of many things that need to change about the insurance industry as we seek to rebuild our reputation with customers following COVID-19.
We recently undertook an independent study that told an interesting story. 76% of those surveyed had no idea what their broker earned as a commission. Yet more than half felt the service they received warranted less than 10%. Only 3% of those surveyed felt anything above 20% was reasonable.
On that basis, it's little wonder that many brokers continue to exhibit reluctance.
I also feel deeply uncomfortable with this falsehood that brokers often perpetuate with clients that "you don't pay me anything for my advice, the insurer pays me."
Whilst linguistically true, it's a devious manipulation of language and purposely misleading to the customer. The implication is that the customer pays nothing for the service, but we all know that the price they pay, the net premium, has been loaded by the amount the broker wishes to take. This practice needs firm action.
Perhaps this is why so few customers ask brokers to disclose their commission, because they're under the misapprehension that they aren't footing the bill.
The spiralling cost of acquisition
No doubt, the cost of winning new customers is also out of control. Insurance is now comfortably the #1 highest pay-per-click ad word on Google at $54.91 per click.
Equally, mergers and acquisitions continue to spiral, with current multiples on revenue reaching 14-21 times EBITDA.
But should the customer bear the high cost of acquiring them as a client, through advertising or acquisition? Absolutely not.
The service they receive should be commensurate with the commission they pay. They are not there to bankroll a broker's growth plans. Acquisitions should be paid for through the profit line of the company, not bankrolled by inflating the cost to the end customer.
However, the problem is not the acquisition cost itself...it's that brokers have failed to upskill in the modern methods of winning new customers. They just throw money at the problem, impatient to achieve scale. And if everybody is doing the same thing, the prices naturally go up.
Equally, the client is often not paying for quality of service – they are paying for the fact the broker has to throw expensive resource at them because of inefficiencies in their process or technology.
The lack of skills around digitisation and technology in insurance could arguably be a blog in itself, but is proving as, if not more crippling to the insurance industry that legacy technology itself.
On new business though, let’s take social channels as an example. Look at any major broker in the UK and their profiles are just a flurry of self-promotional tweets, talking about themselves, under the guise of marketing strategy. The average LinkedIn Social Selling Index score (SSI), a rating out of 100 for how efficiently people are using LinkedIn, is only 21. There is little to no value being delivered, there are no relationships being built, just big faceless corporates in broadcast-mode, shouting at strangers about their achievement and employees sharing it blindly and thinking they’ve just done some social selling.
Everything is about scale; "let's automate our social outreach" you can already hear them say.
So why aren't brokers going out to win new business like any other market? Well...because they don't really have a compelling story on what they can offer over their peers. There is no really catalyst of change. Where is the differentiation between one broker and another? That has been made all the more true through consolidation and closure of so many high street brokers.
In the absence of a differentiator, we fall back on the same old thing….price.
Conclusion
I'll climb down off my high horse now.
It's a bold stance to take in an industry that wants the status quo to remain. I don't kid myself that this stance will win any friends in the broker community. Entire business model and borrowings hinge upon this level of remuneration from insurers. But that doesn't make it right.
If we're to rebuild insurance's reputation, it's not about winning friends within, it's about refocussing outwardly on the customer. It's about reshaping the commercial market to empower customers, inform them and deliver a service that is shaped to their needs, not ours.
It's not my intention to drive down the market, put brokers out of business or force us all to work for next to nothing. But first and foremost, I want to sleep at night knowing that customers have been given a service that is reflective of the time and expertise that they have enjoyed.
They should pay under a model that adds margin to the cost of service, not that adds margin to the cost of service, acquisition and inefficiency. Those inefficiencies may be operational, acquisitional or technological, but it is to us to resolve them, not burden them upon the customer.
A broker recently asked me; "however can you service a £100k property client for less than 10% of the premium?"
My reply; "However can you not?"
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